EIS and SEIS: Tax-Efficient Investment

For UK-based investors and startups, the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) offer attractive opportunities. These government-backed schemes provide tax relief to investors who support early-stage companies, encouraging innovation and growth within the economy. In this article, one of our expert bean-counting Superheroes looks at the details of EIS and SEIS, explaining how they work, their benefits and how businesses can leverage them.

What is the Enterprise Investment Scheme (EIS)?

The Enterprise Investment Scheme (EIS) was introduced in 1994 to help smaller, high-risk businesses raise finance by offering tax reliefs to investors who purchase new shares. This scheme is designed to encourage investment in companies that might otherwise struggle to secure funding.

What is the Seed Enterprise Investment Scheme (SEIS)?

The Seed Enterprise Investment Scheme (SEIS) was launched in 2012, targeting even earlier-stage companies than the EIS. SEIS aims to help small, young businesses raise equity finance by offering significant tax reliefs to individual investors who buy shares in those companies.

Key Features and Benefits

Income Tax Relief

•    EIS: Investors can claim up to 30% income tax relief on investments of up to £1 million per tax year, or £2 million if at least £1 million is invested in knowledge-intensive companies.

•    SEIS: Investors can receive up to 50% income tax relief on investments up to £100,000 per tax year.

Capital Gains Tax (CGT) Exemption

•    EIS: Gains on the disposal of EIS shares are exempt from CGT, provided the shares are held for at least three years.

•    SEIS: Gains on the disposal of SEIS shares are also exempt from CGT, subject to the same holding period.

Loss Relief

•    EIS: If the company fails and the investment is lost, investors can offset the loss against their income tax.

•    SEIS: Similar to EIS, SEIS allows investors to claim loss relief against their income tax.

Diversification and Growth Potential

Investing in EIS and SEIS provides investors with opportunities to diversify their portfolios with high-growth potential startups. These investments, while riskier, can yield substantial returns if the companies succeed.

Some Eligibility Criteria

For Companies

EIS

•    Must be a UK-based company.

•    Must not be trading on a recognised stock exchange.

•    Must not control another company except qualifying subsidiaries.

•    Gross assets must not exceed £15 million before the investment and £16 million after.

•    Must have fewer than 250 full-time equivalent employees.

SEIS

•    Must be a UK-based company.

•    Must not be trading on a recognised stock exchange.

•    Must not control another company except qualifying subsidiaries.

•    Gross assets must not exceed £200,000.

•    Must have fewer than 25 full-time equivalent employees.

•    Must be less than two years old.

For Investors

•    Must not be an employee of the company (directors are an exception).

•    Must not have more than a 30% interest in the company.

Matters to consider

For Companies

1. Preparation and eligibility criteria.

2. Advance Assurance from HMRC. 

3. Issuing Shares.

4. Submitting Compliance Statements to HMRC.

For Investors

1. Researching eligible companies.

2. Investment in the qualifying company.

3. Claiming Relief by using the SEIS3 or EIS3 certificate.

In Summary

The EIS and SEIS are powerful tools for incentivising investment in early-stage companies. These schemes provide significant tax benefits to investors, thereby reducing the financial risk associated with investing in startups. For businesses, securing funding through EIS or SEIS can be a crucial step in scaling operations and achieving long-term success. Whether you're an investor looking for high-growth opportunities or a company seeking investment, understanding and utilising EIS and SEIS can be a game-changer.

For more detail on how to leverage these schemes, please reach out to Finance Box. Our team of experts is here to guide you through every step of the process.